Many are concerned about the recent trajectory of the OECD’s Chinese leading economic indicator and how the country may be heading toward a significant slowdown. Despite a slowing in the pace of contraction, the six-month change in this indicator is in negative territory, according to Pierre Lapointe, global macro strategist at Brockhouse Cooper.

While this trend may prove not to be China’s friend, he says the individual components of the OECD LEI tell a different story. The indicators comprise real economy variables such as the production of chemical fertilizers, production of crude steel and total construction, as well as financial variables including money supply and turnover on the Shanghai stock exchange.

Despite a moderate slowdown following the fiscal stimulus between 2008 and 2010, Mr. Lapointe noted that fertilizer and steel production do not point towards a meaningful slowdown. He also noted that leading indicators of Chinese industrial production show that its manufacturing sector should remain strong in the coming months. Meanwhile, recent purchasing manager index (PMI) demonstrates that new orders and new export orders remain strongly in expansion territory.

Mr. Lapointe believes the LEI is so sluggish because of turnover on the Shanghai stock exchange. With the Shanghai A shares index down 13% for the year, coinciding with a slump in trading volumes, he told clients that “the Chinese stock market is the real drag on the Chinese LEI.”

However, the strategist does not believe China’s stock market accurately reflects its economic momentum. “We think that China’s stock market is particularly prone to speculative excesses and, as such, is not an accurate reflection of the country’s economy,” Mr. Lapointe said, noting that GDP will grow at about 10% this year, but the stock market is down 13% as a result of excessive prior valuations.

He is concerned about China’s property market, which has been on a tear since the U.S. recession ended. Price gains for the high-end segments of the real estate market in large coastal cities appear to be unsustainable, Mr. Lapointe warned.

“Despite cooling in recent months, we think current price appreciation will be difficult to sustain in the coming months,” he said, adding that house price declines remain a risk to the outlook for 2011.